Investment banking is a specific division of banking related to the creation of capital for other companies, governments and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors.
Some of the earliest investment banking practices began in Europe. During the 12th and 13th centuries, European banks made long-terms loans to various rulers. In the 1300’s, Florence, Italy was a banking hub. King Edward III borrowed vast sums of money from the great banks of Florence to fund his war with France. He could not pay the money back, and the three biggest banks in Florence collapsed.
During the 18th century, intermediaries bought government-issued debt and then resold it to investors at a profit. This process soon spread to the United States, where investment bankers quickly copied the practice.
In the early 19th century, the financing of US railroads was dependent upon this investment method, which involved mainly investors overseas as well as wealthy US traders and ship owners. This lead to the grow of investment banking in the U.S. as well as in Europe.
The investment banking industry is still experiencing many changes today. There have been many crisis’s in American history because of little regulation on banks. The government’s monetary policy and regulation of investment banking continually evolves as a result of these panics. Today, investment banks in the United States are continuously reviewed and regulated by the Securities and Exchange Commission, or SEC. They are also intermittently regulated and investigated by Congress. This helps keep it safe for everyone so that history does not repeat itself. It will also help to avoid another panic to happen in the U.S.